For coveted upgrade sustainability is key, says Moody’s exec (First of two parts)

SINGAPORE — Despite an upgrade from a rival agency, it may take a while before the Philippines could notch an investment grade status from Moody’s Investors Service. The credit rating agency said the country has to prove first that  last year’s strong economic performance  is sustainable in the years to come.

 Reforms of the Aquino administration have started bearing fruit, but more needs to be done and an election next month could be a game-changer on how everything else could turn out until 2016, the debt watcher said.

 â€œWhat you have done in the past year is remarkable. Out of the East Asian economies, only China had outgrown the Philippines. But you know, how sustainable is that?” said Christian de Guzman, vice president and senior analyst at Moody’s Sovereign Ratings Group. 

Moody’s— one of the three major credit raters— grades the Philippines one notch below investment grade at Ba1, with a stable outlook, which means “upside and downside risks are balanced.”

 The comment was made before Fitch Ratings upgraded the country to BBB-, an investment grade, last March 27. Standard & Poor’s Ratings Services also put the Philippines one notch below, although it has a “positive” outlook suggesting an upgrade could come soon.

 S&P and Fitch just finished their diligence visits in February and March as part of the rating review process. While Moody’s lags behind the two in terms of rating the Philippines, a visit from its team would not come any soon.

 But De Guzman, a Filipino who evaluates the country from his desk here, said the credit rater would be looking at “economic and fiscal sustainability” to warrant an investment grade rating. 

The Aquino administration has made it its goal this year to reach investment grade — a status seen to lower debt interest payments, increase access to credit and attract foreign investments to once was Southeast Asia’s laggard.

 â€œThis administration has proven that it can do it and I think the market has realized that but it’s really about the sustainability of the change,” De Guzman said.

Fiscal discipline

In October last year, Moody’s upgraded the country from Ba2 after noting “enhanced prospects for growth” and improving state finances, among others. These observations have been supported by hard data later on.

 The economy grew 6.6 percent last year, above the official five to six-percent target for the year, as the government ramped up spending to cushion the impact of slowing trade due to debt crises abroad. 

A double-digit increase in revenues supported the pump-priming, keeping the budget deficit in check at P242.827 billion, equivalent to 2.3 percent of gross domestic product (GDP), lower than the 2.6-percent cap. 

De Guzman praised the gains, in particular, how Moody’s has observed a decline on interest payments as a portion of total revenues, from about 30 to 35 percent a decade ago to just “below 20 percent” now.

 This, in turn, has provided space for the government to channel more funds to infrastructure projects and social programs — something it did not have before.

 â€œIn 2010, during the elections, fiscal spending in the Philippines really increased way above the budget that if the new administration did not enter in July and tightened the screws, you would have seen a very, very large deficit,” De Guzman explained.

 Much of this fiscal discipline was rooted from the Aquino administration’s resolve to fight tax evasion and smuggling. The passage of the excise tax reform law also helped, he said, but was quick to point that “structural reforms” are needed.

 For one, he has his own qualms on how far can the government run after tax cheats to improve revenue collections. De Guzman recalled that during the time of former Finance Secretary Roberto de Ocampo, similar tack was undertaken, which unfortunately, did not last beyond his term.

 During the time, tax service centers were established almost everywhere, including malls, for easier tax payments. “And you see people really paid taxes and thus revenue-to-GDP ratio was higher than now, but since then it started falling off again,” De Guzman explained. 

“So that is the same question now: how much of this is temporary and how much of this is structural shift to the way people think?” he said.

 â€œHow long can you keep up? It points again to the sustainability of the game.”  (To be continued)